Buybacks Taxes: From October 1, 2024, the way buybacks are taxed in India will change in a big way. Until now, when a company bought back its own shares, it paid the tax about 23% and the shareholder didn’t have to worry about it. But now, the tax burden is shifting directly to the investor, which makes it much heavier for people, especially those in higher tax slabs. What’s worse is, investors can’t even reduce their tax bill by subtracting the original price they paid to buy the shares. That means even though they made less profit, they may still pay tax on the entire amount they receive from the company.
This new rule is part of the changes introduced in the July 2024 Budget. It adds a new section in the Income Tax Act that says whatever you get in a buyback will be treated as a kind of dividend and taxed just like your regular income. So, if you’re in the highest tax bracket, you could pay close to 36% tax on buyback proceeds.
Buybacks less in Demand
Companies used to prefer buybacks as a way to return money to investors. They bought back their shares and reduced the number of shares in the market, which often helped push the stock price up too.
For example, earlier, when a company did a buyback, it paid the tax and you got your money tax-free. if the same buyback happens after October 1, the company doesn’t pay the tax you do. And you’ll be taxed based on your income slab. So, if you’re in the highest tax slab, you’ll pay almost 36% tax on what you get, even if you didn’t make that much profit in the first place, reproted BT.
Since you can’t subtract your cost of buying the shares, your actual gain is not taken into account. Instead, that cost can only be used as a capital loss later when you make profits from some other investment.
Because of all this, many companies may now move away from buybacks and look at other ways to give returns to shareholders. Regular dividends could become more popular again, since they are taxed similarly now but don’t carry the same confusion or high burden as buybacks under the new rule. Special one-time dividends or interim dividends may also be used more often.
What Should Investors do?
If you’re someone who holds stocks and waits for buybacks to make a quick profit, this new rule is not good news. It may now make more sense to hold on to shares for a longer time and wait for regular dividends or long-term capital gains. With the Budget 2025 changes, long-term capital gains tax has gone down to 12.5%, which is much better than paying 36% on a buyback.
This means your strategy might have to change. Long-term investing could now be better than trying to make quick money from buybacks. High-income investors, especially, should be careful, because they will feel the most pain from this new rule.
Could This Hurt India’s Global Image for Investors?
This rule could also affect how foreign investors view Indian companies. In many countries, buybacks are tax-free or taxed much less, so if India starts taxing investors heavily, it might make Indian companies less attractive.
Also by taxing both dividends and buybacks similarly, the new rule removes loopholes and brings more fairness. It could lead to better discipline in how companies return profits to shareholders. Some companies may also try using tax treaties (like DTAA) to reduce the final tax that foreign investors have to pay, which could keep India competitive for global capital.
